QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-36380

___________________________________________________

Google Inc.

(Exact name of registrant as specified in its charter)

___________________________________________________

Delaware

77-0493581

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1600 Amphitheatre Parkway

Mountain View, CA 94043

(Address of principal executive offices, including zip code)

(650) 253-0000

(Registrant’s telephone number, including area code)

___________________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

At April 16, 2014, there were 281,667,778 shares of Google’s Class A common stock outstanding, 55,579,441 shares of Google’s Class B common stock outstanding and 337,246,657 Class C capital stock outstanding.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding:

•

the growth of our business and revenues and our expectations about the factors that influence our success and trends in our business;

•

our plans to continue to invest in new businesses, products and technologies, systems, facilities, and infrastructure, to continue to hire aggressively and provide competitive compensation programs, as well as to continue to invest in acquisitions;

our expectation that growth in advertising revenues from our websites will continue to exceed that from our Google Network Members’ websites, which will have a positive impact on our operating margins;

•

our expectation that we will continue to pay most of the fees we receive from advertisers on our Google Network Members' websites to our Google Network Members;

•

our expectation that we will continue to take steps to improve the relevance of the ads we deliver and to reduce the number of accidental clicks;

our expectation that our cost of revenues, research and development expenses, sales and marketing expenses, and general and administrative expenses will increase in dollars and may increase as a percentage of revenues;

•

our potential exposure in connection with pending investigations, proceedings, and other contingencies;

•

our expectation that our traffic acquisition costs will fluctuate in the future;

•

our continued investments in international markets;

•

estimates of our future compensation expenses;

•

fluctuations in our effective tax rate;

•

the sufficiency of our sources of funding;

•

our payment terms to certain advertisers, which may increase our working capital requirements;

•

fluctuations in our capital expenditures;

•

our expectations regarding the trading price of our Class A common stock and Class C capital stock; and

•

our expectations about the disposition of the Motorola Mobile business;

as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may appear throughout this report, including without limitation, the following sections: Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A, “Risk Factors.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the caption “Risk Factors” in Part II, Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission (SEC). We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

As used herein, “Google,”“we,”“our,” and similar terms include Google Inc. and its subsidiaries, unless the context indicates otherwise.

“Google” and other trademarks of ours appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

We were incorporated in California in September 1998 and re-incorporated in the State of Delaware in August 2003. We generate revenues primarily by delivering relevant, cost-effective online advertising.

On January 29, 2014, we entered into an agreement with Lenovo Group Limited (Lenovo) providing for the disposition of the Motorola Mobile business. As such, the financial results of Motorola Mobile are presented as "Net loss from discontinued operations" on the Consolidated Statements of Income for the three months ended March 31, 2013 and 2014; and assets and liabilities of Motorola Mobile to be disposed of are presented as "Assets held for sale" and "Liabilities held for sale" on the Consolidated Balance Sheet as of March 31, 2014, respectively.

On April 2, 2014, the Company completed a two-for-one stock split effected in the form of a stock dividend. All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect this two-for-one stock split. See Notes 2 and 12 for additional information about the stock split effected in the form of a stock dividend.

Basis of Consolidation

The consolidated financial statements include the accounts of Google Inc. and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

Unaudited Interim Financial Information

The accompanying Consolidated Balance Sheet as of March 31, 2014, the Consolidated Statements of Income for the three months ended March 31, 2013 and 2014, the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2014, and the Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2014 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of March 31, 2014, our results of operations for the three months ended March 31, 2013 and 2014, and our cash flows for the three months ended March 31, 2013 and 2014. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014.

These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on February 12, 2014.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of stock-based awards, inventory valuations, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Recent Accounting Pronouncement

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-08 (ASU 2014-08) “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals

that have not been reported in financial statements previously issued. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements.

Prior Period Reclassifications

Reclassifications of prior period amounts related to discontinued operations as a result of the expected Motorola Mobile disposition, and share and per-share amounts due to the two-for-one stock split effected in the form of a stock dividend have been made to conform to the current period presentation.

Note 2. Net Income Per Share of Class A and Class B Common Stock and Class C Capital Stock

In April 2012, our board of directors approved amendments to our certificate of incorporation that created a new class of non-voting capital stock (Class C capital stock). The amendments authorized 3 billion shares of Class C capital stock and also increased the authorized shares of Class A common stock from 6 billion to 9 billion. The amendments are reflected in our Fourth Amended and Restated Certificate of Incorporation (New Charter), the adoption of which was approved by stockholders at our 2012 Annual Meeting of Stockholders held on June 21, 2012. In January 2014, our board of directors approved a distribution of shares of the Class C capital stock as a dividend to our holders of Class A and Class B common stock (Stock Split). The Stock Split had a record date of March 27, 2014 and a payment date of April 2, 2014.

Share and per-share amounts disclosed as of March 31, 2014 and for all other comparative periods provided have been retroactively adjusted to reflect the effects of the Stock Split. The Class C capital stock has no voting rights, except as required by applicable law. Except as expressly provided in the New Charter and as noted in the following sentence, shares of Class C capital stock have the same rights and privileges and rank equally, share ratably and are identical in all other respects to the shares of Class A common stock and Class B common stock as to all matters including dividend and distribution rights. In accordance with the settlement of litigation involving the authorization to distribute the Class C capital stock, we may be obligated to make a payment to holders of the Class C stock if, on average, Class C trades below Class A during the first 365 days following the Class C issuance, payable in cash, Class A stock, Class C stock, or a combination thereof, at the discretion of the board of directors.

The following table sets forth the computation of basic and diluted net income per share of Class A and Class B common stock and Class C capital stock (in millions, except share amounts which are reflected in thousands and per share amounts):

The number of shares and per share amounts for the prior period presented have been retroactively restated to reflect the two-for-one stock split effected in the form of a stock dividend issued on April 2, 2014.

The net income per share amounts are the same for Class A and Class B common stock and Class C capital stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

We measure our cash equivalents, marketable securities, and foreign currency and interest rate derivative contracts at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value:

Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.

Level 3 - Unobservable inputs that are supported by little or no market activities.

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

We classify our cash equivalents and marketable securities within Level 1 or Level 2 because we use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. We classify our foreign currency and interest rate derivative contracts primarily within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

Cash, Cash Equivalents and Marketable Securities

The following tables summarize our cash, cash equivalents and marketable securities by significant investment categories as of December 31, 2013 and March 31, 2014 (in millions):

The balances at December 31, 2013 and March 31, 2014 were related to cash collateral received in connection with our securities lending program, which was invested in reverse repurchase agreements maturing within three months. See below for further discussion of this program.

Cash, cash equivalents and marketable securities to be disposed of as a result of the Motorola Mobile disposition were included in "Assets held for sale" on the Consolidated Balance Sheet as of March 31, 2014, and accordingly, are not included in this table.

During the second quarter of 2013, we received approximately $175 million in Arris Group, Inc. (Arris) common stock (10.6 million shares) in connection with the sale of the Motorola Home business (see details in Note 8). These shares are accounted for as available-for-sale marketable equity securities.

We determine realized gains or losses on the sale of marketable securities on a specific identification method. We recognized gross realized gains of $75 million and $98 million for the three months ended March 31, 2013 and 2014. We recognized gross realized losses of $15 million and $24 million for the three months ended March 31, 2013 and 2014. We reflect these gains and losses as a component of interest and other income, net, in the accompanying Consolidated Statements of Income.

The following table summarizes the estimated fair value of our investments in marketable debt securities, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities (in millions):

The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2013 and March 31, 2014, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):

We periodically review our marketable debt and equity securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. For marketable debt securities, we also consider whether (i) it is more likely than not that we will be required to sell the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses. During the three months ended March 31, 2013 and 2014, we did not recognize any other-than-temporary impairment loss.

Securities Lending Program

From time to time, we enter into securities lending agreements with financial institutions to enhance investment income. We loan selected securities which are collateralized in the form of cash or securities. Cash collateral is invested in reverse repurchase agreements which are collateralized in the form of securities.

We classify loaned securities as cash equivalents or marketable securities and record the cash collateral as an asset with a corresponding liability in the accompanying Consolidated Balance Sheets. We classify reverse repurchase agreements maturing within three months as cash equivalents and those longer than three months as receivable under reverse repurchase agreements in the accompanying Consolidated Balance Sheets. For security collateral received, we do not record an asset or liability except in the event of counterparty default.

Derivative Financial Instruments

We recognize derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the accompanying Consolidated Statements of Income as interest and other income, net, as part of revenues, or as a component of accumulated other comprehensive income (AOCI) in the accompanying Consolidated Balance Sheets, as discussed below.

We enter into foreign currency contracts with financial institutions to reduce the risk that our cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. We use certain interest rate derivative contracts to hedge interest rate exposures on our fixed income securities and our anticipated debt issuance. Our program is not used for trading or speculative purposes.

We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. To further reduce credit risk, we enter into collateral security arrangements under which the counterparty is required to provide collateral when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We can take possession of the collateral in the event of counterparty default. As of December 31, 2013 and March 31, 2014, we received cash collateral related to the derivative instruments under our collateral security arrangements of $35 million and $7 million.

Cash Flow Hedges

We use options designated as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar. The notional principal of these contracts was approximately $10.0 billion and $7.9 billion as of December 31, 2013 and March 31, 2014. These foreign exchange contracts have maturities of 36 months or less.

In 2012, we entered into forward-starting interest rate swaps, with a total notional amount of $1.0 billion and terms calling for us to receive interest at a variable rate and to pay interest at a fixed rate, that effectively locked in an interest rate on our anticipated debt issuance of $1.0 billion in 2014. We issued $1.0 billion of unsecured senior notes in February 2014 (See details in Note 4). As a result, we terminated the forward-starting interest rate swaps upon the debt issuance. The gain associated with the termination is reported within operating activities in the Consolidated Statement of Cash Flows for the three months ended March 31, 2014, consistent with the impact of the hedged item.

We reflect gains or losses on the effective portion of a cash flow hedge as a component of AOCI and subsequently reclassify cumulative gains and losses to revenues or interest expense when the hedged transactions are recorded. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI would be immediately reclassified to interest and other income, net. Further, we exclude the change in the time value of the options from our assessment of hedge effectiveness. We record the premium paid or time value of an option on the date of purchase as an asset. Thereafter, we recognize changes to this time value in interest and other income, net.

As of March 31, 2014, the effective portion of our cash flow hedges before tax effect was $68 million, of which $17 million is expected to be reclassified from AOCI into earnings within the next 12 months.

Fair Value Hedges

We use forward contracts designated as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. Gains and losses on these contracts are recognized in interest and other income, net, along with the offsetting losses and gains of the related hedged items. We exclude changes in the time value for forward contracts from the assessment of hedge effectiveness. The notional principal of these contracts was $1.2 billion and $1.4 billion as of December 31, 2013 and March 31, 2014.

Other Derivatives

Other derivatives not designated as hedging instruments consist of forward and option contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the local currency of a subsidiary. We recognize gains and losses on these contracts, as well as the related costs in interest and other income, net, along with the foreign currency gains and losses on monetary assets and liabilities. The notional principal of foreign exchange contracts outstanding was $9.4 billion and $7.5 billion at December 31, 2013 and March 31, 2014.

We also use exchange-traded interest rate futures contracts and “To Be Announced” (TBA) forward purchase commitments of mortgage-backed assets to hedge interest rate risks on certain fixed income securities. The TBA contracts meet the definition of derivative instruments in cases where physical delivery of the assets is not taken at the earliest available delivery date. Our interest rate futures and TBA contracts (together interest rate contracts) are not designated as hedging instruments. We recognize gains and losses on these contracts, as well as the related costs, in interest and other income, net. The gains and losses are generally economically offset by unrealized gains and losses in the underlying available-for-sale securities, which are recorded as a component of AOCI until the securities are sold or other-than-temporarily impaired, at which time the amounts are moved from AOCI into interest and other income, net. The total notional amounts of interest rate contracts outstanding were $13 million at December 31, 2013 and $75 million at March 31, 2014.

The fair values of our outstanding derivative instruments were as follows (in millions):

As of December 31, 2013

Balance Sheet Location

Fair Value of

Derivatives

Designated as

Hedging Instruments

Fair Value of

Derivatives Not

Designated as

Hedging Instruments

Total Fair

Value

Derivative Assets:

Level 2:

Foreign exchange contracts

Prepaid revenue share, expenses and other assets, current and non-current

$

133

$

12

$

145

Interest rate contracts

Prepaid revenue share, expenses and other assets, current and non-current

We present our derivatives, securities lending and reverse repurchase agreements at gross fair values in the Consolidated Balance Sheets. However, our master netting and other similar arrangements allow net settlements under certain conditions. As of December 31, 2013 and March 31, 2014, information related to these offsetting arrangements was as follows (in millions):

Offsetting of Assets

As of December 31, 2013

Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset

Description

Gross Amounts of Recognized Assets

Gross Amounts Offset in the Consolidated Balance Sheets

Net Presented in the Consolidated Balance Sheets

Financial Instruments

Cash Collateral Received

Non-Cash Collateral Received

Net Assets Exposed

Derivatives

$

232

$

0

$

232

$

(2

)

(1)

$

(35

)

$

(52

)

$

143

Reverse repurchase agreements

1,370

0

1,370

(2)

0

0

(1,370

)

0

Total

$

1,602

$

0

$

1,602

$

(2

)

$

(35

)

$

(1,422

)

$

143

As of March 31, 2014

Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset

Description

Gross Amounts of Recognized Assets

Gross Amounts Offset in the Consolidated Balance Sheets

Net Presented in the Consolidated Balance Sheets

Financial Instruments

Cash Collateral Received

Non-Cash Collateral Received

Net Assets Exposed

(unaudited)

Derivatives

$

84

$

0

$

84

$

(5

)

(1)

$

(7

)

$

(9

)

$

63

Reverse repurchase agreements

2,153

0

2,153

(2)

0

0

(2,153

)

0

Total

$

2,237

$

0

$

2,237

$

(5

)

$

(7

)

$

(2,162

)

$

63

(1) The balances at December 31, 2013 and March 31, 2014 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements.

(2) The balances at December 31, 2013 and March 31, 2014 included $1,270 million and $2,103 million recorded in cash and cash equivalents, respectively, and $100 million and $50 million recorded in receivable under reverse repurchase agreements, respectively.

Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset

Description

Gross Amounts of Recognized Liabilities

Gross Amounts Offset in the Consolidated Balance Sheets

Net Presented in the Consolidated Balance Sheets

Financial Instruments

Cash Collateral Pledged

Non-Cash Collateral Pledged

Net Liabilities

Derivatives

$

4

$

0

$

4

$

(2

)

(3)

$

0

$

0

$

2

Securities lending agreements

1,374

0

1,374

0

0

(1,357

)

17

Total

$

1,378

$

0

$

1,378

$

(2

)

$

0

$

(1,357

)

$

19

As of March 31, 2014

Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset

Description

Gross Amounts of Recognized Liabilities

Gross Amounts Offset in the Consolidated Balance Sheets

Net Presented in the Consolidated Balance Sheets

Financial Instruments

Cash Collateral Pledged

Non-Cash Collateral Pledged

Net Liabilities

(unaudited)

Derivatives

$

18

$

0

$

18

$

(5

)

(3)

$

0

$

0

$

13

Securities lending agreements

2,153

0

2,153

0

0

(2,124

)

29

Total

$

2,171

$

0

$

2,171

$

(5

)

$

0

$

(2,124

)

$

42

(3) The balances at December 31, 2013 and March 31, 2014 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.

Note 4. Debt

Short-Term Debt

We have a debt financing program of up to $3.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. At December 31, 2013 and March 31, 2014, we had $2.0 billion of outstanding commercial paper recorded as short-term debt with weighted-average interest rates of 0.1%. In conjunction with this program, we have a $3.0 billion revolving credit facility expiring in July 2016. The interest rate for the credit facility is determined based on a formula using certain market rates. At December 31, 2013 and March 31, 2014, we were in compliance with the financial covenant in the credit facility, and no amounts were outstanding under the credit facility at December 31, 2013 and March 31, 2014. The estimated fair value of the commercial paper approximated its carrying value at December 31, 2013 and March 31, 2014.

Our short-term debt balance also includes the short-term portion of certain long-term debt, as described in the section below.

Long-Term Debt

We issued $1.0 billion of unsecured senior notes (the "2014 Notes") in February 2014 and $3.0 billion of unsecured senior notes in three tranches (collectively, the "2011 Notes") in May 2011. We entered into a capital lease obligation in August 2013. The details of these financing arrangements are described in the table below (in millions):

The effective interest yields of the Notes due in 2014, 2016, 2021, and 2024 were 1.258%, 2.241%, 3.734% and 3.377%, respectively. Interest on the 2011 and 2014 Notes are payable semi-annually. The 2011 and 2014 Notes rank equally with each other with all of our other senior unsecured and unsubordinated indebtedness from time to time outstanding. We may redeem the 2011 and 2014 Notes at any time in whole or in part at specified redemption prices. We are not subject to any financial covenants under the 2011 Notes or the 2014 Notes. We used the net proceeds from the issuance of the 2011 Notes to repay a portion of our outstanding commercial paper and for general corporate purposes. We intend to use the net proceeds from the issuance of the 2014 Notes for general corporate purposes including the repayment of the principal amount of our 2011 Notes due on May 19, 2014. The total estimated fair value of the 2011 and 2014 Notes was approximately $3.1 billion and $4.1 billion at December 31, 2013 and March 31, 2014, respectively. The fair value of the 2011 and 2014 Notes was determined based on observable market prices of identical instruments in less active markets and is categorized accordingly as Level 2 in the fair value hierarchy.

In August 2013, we entered into a capital lease obligation on certain property expiring in 2028 with an option to purchase the property in 2016. The effective rate of the capital lease obligation approximates the market rate. The estimated fair value of the capital lease obligation approximated its carrying value at December 31, 2013 and March 31, 2014.

Note 5. Balance Sheet Components

Inventories

Inventories consisted of the following (in millions):

As of December 31, 2013

As of March 31, 2014

(unaudited)

Raw materials and work in process

$

115

$

2

Finished goods

311

335

Inventories

$

426

$

337

Inventories to be disposed of as a result of the Motorola Mobile disposition were included in "Assets held for sale" on the Consolidated Balance Sheet as of March 31, 2014, and accordingly, are not included in this table.

Property under capital lease with a cost basis of $258 million was included in land and buildings and construction in progress as of March 31, 2014. Additionally, property and equipment to be disposed of as a result of the Motorola Mobile disposition were included in "Assets held for sale" on the Consolidated Balance Sheet as of March 31, 2014, and accordingly, are not included in this table.

Accumulated Other Comprehensive Income (Loss)

The components of AOCI, net of tax, were as follows (in millions, unaudited):

Foreign Currency Translation Adjustments

Unrealized Gains (Losses) on Available-for-Sale Investments

Unrealized Gains on Cash Flow Hedges

Total

Balance as of December 31, 2012

$

(73

)

$

604

$

7

$

538

Other comprehensive income (loss) before reclassifications

(168

)

(55

)

109

(114

)

Amounts reclassified from AOCI

0

(46

)

(22

)

(68

)

Other comprehensive income (loss)

(168

)

(101

)

87

(182

)

Balance as of March 31, 2013

$

(241

)

$

503

$

94

$

356

Foreign Currency Translation Adjustments

Unrealized Gains (Losses) on Available-for-Sale Investments

Unrealized Gains on Cash Flow Hedges

Total

Balance as of December 31, 2013

$

16

$

50

$

59

$

125

Other comprehensive income (loss) before reclassifications

65

217

10

292

Amounts reclassified from AOCI

0

(67

)

(5

)

(72

)

Other comprehensive income (loss)

65

150

5

220

Balance as of March 31, 2014

$

81

$

200

$

64

$

345

The effects on net income of amounts reclassified from AOCI were as follows (in millions, unaudited):